Three Key Portfolio Strategies for Managing Rising Rates: A Scenario Analysis

Abstract:

"As we previewed in the December 2012 edition of By The Numbers, in “Three Options For Investors Wondering What to Do About Low Rates,” fixed income investors are rightly concerned about the possibility of rising rates and a robust debate has arisen as to how to position portfolios against that eventuality. In the current issue, we discuss three strategies for positioning against higher rates and will discuss the tradeoffs among them in the context of varying rates and market scenarios. The three strategies are: 1) Sector Allocation, or the attempt to mitigate the impact of potential rate increases at the cost of increased tracking error relative to a traditional benchmark, 2) Yield Curve Positioning, or the choice to shift fixed income allocations to shorter duration mandates, and 3) Rate Hedge Overlay, which argues for retaining broad fixed income market exposure alongside the purchase of insurance against specific interest rate outcomes. We examine each of these approaches in turn."

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